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Saturday, May 19, 2012

THE people who pioneered democracy in Europe and the United States had a low but pretty accurate view of human nature. They knew that if we get the chance, most of us will try to get something for nothing. They knew that people generally prize short-term goodies over long-term prosperity. So, in centuries past, the democratic pioneers built a series of checks to make sure their nations wouldn't be ruined by their own frailties.

The American founders did this by decentralising power. They built checks and balances to frustrate and detain the popular will. They also dispersed power to encourage active citizenship, hoping that as people became more involved in local government, they would develop a sense of restraint and responsibility.

In Europe, by contrast, authority was centralised. Power was held by small coteries of administrators and statesmen, many of whom had attended the same elite academies where they were supposed to learn the art and responsibilities of stewardship.

Under the parliamentary system, voters didn't even get to elect their leaders directly. They voted for parties, and party elders selected the ones who would actually form the government, often through secret means.

Although the forms were different, the democracies in Europe and the US were based on a similar carefully balanced view of human nature: People are naturally selfish and need watching. But democratic self-government is possible because we're smart enough to design structures to police that selfishness.

James Madison put it well: 'As there is a degree of depravity in mankind, which requires a certain degree of circumspection and distrust: So there are other qualities in human nature, which justify a certain portion of esteem and confidence.'

But, over the years, this balanced wisdom was lost. Leaders today do not believe their job is to restrain popular will. Their job is to flatter and satisfy it. A gigantic polling apparatus has developed to help leaders anticipate and respond to popular whims. Democratic politicians adopt the mindset of marketing executives. Give the customer what he wants. The customer is always right.

Having lost a sense of their own frailty, many voters have come to regard their desires as entitlements. They become incensed when their leaders are not responsive to their needs. Like any normal set of human beings, they command their politicians to give them benefits without asking them to pay.

The consequences of this shift are now obvious. In Europe and America, governments have made promises they can't afford to fulfil. At the same time, the decision-making machinery is breaking down. US and European capitals still have the structures inherited from the past but without the self-restraining ethos that made them function.

The US decentralised system of checks and balances has transmogrified into a fragmented system that scatters responsibility. Congress is capable of passing laws that give people benefits with borrowed money, but it gridlocks when it tries to impose self- restraint.

The Obama campaign issues its famous 'Julia' ad, which perfectly embodies the vision of government as a national Sugar Daddy, delivering free money and goodies up and down the life cycle. The Citizens United case gives well-financed interests tremendous power to preserve or acquire tax breaks and regulatory deals. US senior citizens receive health benefits that cost many times more than the contributions they put into the system.

In Europe, workers want great lifestyles without long work hours. They want dynamic capitalism but also personal security. European welfare states go broke trying to deliver these impossibilities. The European ruling classes once had their power checked through daily contact with the tumble of national politics.

But now those ruling classes have built a technocratic apparatus, the European Union, operating far above popular scrutiny. Decisions that reshape the destinies of families and nations are being made at some mysterious, transnational level. Few Europeans can tell who is making decisions or who is to blame if they go wrong, so, of course, they feel powerless and distrustful.

Western democratic systems were based on a balance between self-doubt and self-confidence. They worked because there were structures that protected the voters from themselves and the rulers from themselves. Once people lost a sense of their own weakness, the self-doubt went away and the chastening structures were overwhelmed. It became madness to restrain your own desires because surely your rivals over yonder would not be restraining theirs.

This is one of the reasons why Europe and the US are facing debt crises and political dysfunction at the same time. People used to believe that human depravity was self-evident and democratic self-government was fragile. Now they think depravity is nonexistent and they take self-government for granted.

Neither the US nor the European model will work again until we rediscover and acknowledge our own natural weaknesses and learn to police rather than lionise our impulses.

POLITICAL scandals sometimes perform a valuable function in cleansing governments. They destroy the political careers of individuals of dubious character. More importantly, they can debunk political myths central to the legitimacy of some regimes.

That appears to be the case with the Bo Xilai affair in China. One enduring political myth that went down with Mr Bo, the former Communist Party boss of Chongqing municipality, is the notion that the party's rule is based on meritocracy.

In many ways, Mr Bo personified the Chinese concept of 'meritocracy' - well-educated, intelligent, sophisticated and charming (mainly to Western executives). But, after his fall, a very different picture emerged. Aside from his alleged involvement in assorted crimes, Mr Bo was said to be a ruthless apparatchik, endowed with an outsize ego but no real talent. His record as a local administrator was mediocre.

Mr Bo's rise to power owed much to his pedigree (his father was a vice-premier), his political patrons and his manipulation of the rules of the game.

For example, visitors to Chongqing marvel at the soaring skyscrapers and modern infrastructure built during Mr Bo's tenure there. But do they know that his administration borrowed the equivalent of more than 50 per cent of local gross domestic product (GDP) to finance the construction binge, and that a large portion of the debt will go unpaid?

Unfortunately, Mr Bo's case is not the exception in China, but the rule. Contrary to the prevailing perception in the West (especially among business leaders), the current Chinese government is riddled with clever apparatchiks like Mr Bo who have acquired their positions through cheating, corruption, patronage and manipulation.

One of the most obvious signs of systemic cheating is that many Chinese officials use fake or dubiously acquired academic credentials to burnish their resumes. Because educational attainment is considered a measure of merit, officials scramble to obtain advanced degrees in order to gain an advantage in the competition for power.

The overwhelming majority of these officials end up receiving doctorates (a master's degree won't do anymore in this political arms race) granted through part-time programmes or in the Communist Party's training schools. Of the 250 members of provincial Communist Party standing committees, an elite group including party chiefs and governors, 60 claim to have earned PhDs.

Tellingly, only 10 of them completed their doctoral studies before becoming government officials. The rest received their doctorates (mostly in economics, management, law and industrial engineering) through part-time programmes while performing their duties as busy government officials. One managed to complete his degree in a mere 21 months, an improbable feat, given that course work alone, without the dissertation, normally requires at least two years in most countries' doctoral programmes.

If so many senior Chinese officials openly flaunt fraudulent or dubious academic degrees without consequences, one can imagine how widespread other forms of corruption must be.

Another common measure used to judge a Chinese official's 'merit' is his ability to deliver economic growth. On the surface, this may appear to be an objective yardstick. In reality, GDP growth is as malleable as an official's academic credentials.

Inflating local growth numbers is so endemic that reported provincial GDP growth data, when added up, is always higher than the national growth data, a mathematical impossibility. And, even when they do not doctor the numbers, local officials can game the system in another way.

Because of their relatively short tenure in one position before promotion (less than three years, on average, for local mayors), Chinese officials are under enormous pressure to demonstrate their ability to produce economic results quickly.

One sure way of doing so is to use financial leverage, typically by selling land or using land as collateral to borrow large sums of money from often-obliging state- owned banks, to finance massive infrastructure projects, as Mr Bo did in Chongqing.

The result is promotion for such officials, because they have delivered quick GDP growth. But the economic and social costs are very high. Local governments are saddled with a mountain of debt and wasted investments, banks accumulate risky loans, and farmers lose their land.

Worse, as competition for promotion within the Chinese bureaucracy has escalated, even fake academic credentials and GDP growth records have become insufficient to advance one's career. What increasingly determines an official's prospects for promotion is his guanxi, or connections.

Based on surveys of local officials, patronage, not merit, has become the most critical factor in the appointment process. For those without guanxi, the only recourse is to purchase appointments and promotions through bribes.

In the Chinese parlance, the practice is called maiguan, literally 'buying office'. The official Chinese press is full of corruption scandals of this type.

Given such systemic debasement of merit, few Chinese citizens believe that they are governed by the best and the brightest.

But astonishingly, the myth of a Chinese meritocracy remains very much alive among Westerners who have encountered impressively credentialed officials like Mr Bo. The time has come to bury it.

Greece's exit would be no less catastrophic than when the EU called it unthinkable - and not just for Greece.

"Divorce is never smooth," Mr Luc Coene, the governor of Belgium's central bank and a member of the European Central Bank's governing council, told the Financial Times on Sunday. "I guess an amicable divorce - if that was ever needed - would be possible but I would still regret it."

Amicable? That's one thing Greece's exit from the euro could not be.

As the economist Barry Eichengreen, the leading authority on these matters, has argued, it would provoke "the mother of all financial crises". The contemplation of this possibility by EU leaders is making matters even worse. Greece has no chance of recovery while this danger hangs over its economy.

DEVALUATION'S OTHER SIDE

Departing a currency zone under pressure is not the same as being forced off a currency peg - which, though painful, can be better than the alternative.

Contracts would have to be redenominated and euro banknotes would have to be over-stamped before a new currency could be printed and circulated. That takes time and since a huge devaluation is part of the formula, rigorous capital controls would have to be imposed on a country fully integrated into the wider EU economy. Bankruptcies would cascade through the system and the Greek economy, at least for a time, would shut down.

Devaluation would restore competitiveness - but to what end? Greece has a small export sector reliant on tourism.

The other side of a devaluation - and a necessary condition for its success - is higher import prices and hence lower real wages. But resistance to the latter is why Greece is rejecting "austerity" to begin with.

Once Greece has its own currency again, it can resist falling living standards by printing money. That would neutralise the gain in competitiveness and lead, in the worst case, to hyperinflation.

RIPPLE EFFECTS

Advocates of an exit are saying, in effect, that if Greece were well governed, it could avoid that outcome.

It could clear its debts through comprehensive default (as opposed to the partial default it has already tried); restart its banking system from scratch; eliminate its primary budget deficit through orderly spending cuts and tax increases; submit to lower real wages; and (eventually) restore its economy to health.

Possibly. But if Greece were well governed, we would not be having this conversation.

You might therefore say, tough luck on Greece. Let it collapse and see what happens. That would be a salutary experience for the Greeks and would teach others not to go the same way.

The problem is that the effects of political and economic breakdown in Greece would spread much further.

Mr Coene and other officials have been saying that Europe's financial defences could withstand Greece's exit and full default. It has been true all along that Greece is small enough to pose no systemic threat in its own right to the wider EU economy.

That's why the EU's decision to allow this crisis to persist and worsen is such an amazing case of incompetence and irresponsibility.

CONTAGION'S TWO CHANNELS

The threat to Europe was never Greece but Europe's mismanagement of Greece. The big problem, getting bigger all the time, is the failure to deal with that small problem.

There are two main channels of contagion from a Greek exit. One runs through Greek debts to foreigners. This is probably manageable, even though the EU's assurances about the soundness of its banks and the adequacy of its preparations are, on the evidence to date, grounds for panic rather than confidence. Certainly the EU's wider financial system has had time to prepare.

The real danger, as a Bloomberg View editorial makes clear, is through the second channel. If Greece can exit the euro, why not Portugal? Why not Spain? Why not Italy?

Even if the consequences of a Greek exit are as horrendous as I'm saying, those outcomes will no longer be "unthinkable". The break-up of the entire euro system will become a choice, however unattractive, rather than something that just cannot happen.

This means, among other things, faster capital flight from distressed peripheral countries to the core - compounding their difficulties and making their exit that much more likely. Investors have already started discussing how much smaller the euro system might need to be.

STOPPING THE ROT

Here we come to the great irony in all this. The EU will surely strive to prevent the break-up of the wider euro system. Its leaders know that if the euro falls apart, the unravelling of the EU - again unthinkable, until now - becomes distinctly possible.

So far, the EU's political momentum has always pushed it towards closer union. A splintering of the euro system would be the first time the EU had responded to a crisis by undoing earlier commitments rather than building on them. That's a bad habit to get into.

So Greece's exit from the euro area would demand countervailing assurances that the rot stops there.

The crucial innovations that Germany and its allies in austerity have resisted so far - jointly guaranteed euro bonds and the European Central Bank as a lender of last resort for distressed sovereign borrowers - would have to be adopted.

The measures that would have stopped things ever getting this bad would finally have to be taken up.

Greece's ruin will have been for nothing, except to serve as an example to others. Likewise, the distress in Spain and other peripheral countries. Steps towards full fiscal union will have been taken not because Europe's citizens want them, not as a measured response to the crisis, but far too late, out of desperation after everything else had failed, with a correspondingly increased risk of failure.

The EU will have shown that it cracks under pressure, which won't be forgotten. And this is assuming all goes well.

Wednesday, May 16, 2012

CommentaryEurope faces its biggest political tests as Greece heads for euro exit

By Jonathan Eyal

ALTHOUGH few dare say so publicly, most European leaders privately accept that the unthinkable is about to happen: Greece may have to leave the euro zone. Financial markets are already making preparations for an event they nicknamed 'Grexit'.

Still, the manner of the Greeks' departure and the way the aftermath of the crisis is handled will shape Europe's destiny for years. The continent's biggest political tests are beginning.

In theory, Greece can still pull back from the brink. Even if no ruling coalition is feasible, a caretaker government pledged to respect the nation's obligations remains in place.

But the reality is that the battle for the soul of Greece is already lost. Two-thirds of its voters opted for parties determined to stop repaying the country's debts, while claiming that they also wish to keep the euro - in other words a majority wants to have its cake and eat it too.

Those responsible for this curious outcome are Greece's own politicians, who nurtured a collective mood of self-denial. Many ordinary Greeks genuinely believe that their country is a victim of a 'plot' by bankers, who first encouraged Greece to borrow excessively, and are now lending more money at high interest rates in order to recover their debts.

The fact that Greece itself is responsible for its excessive borrowing impresses few. Nor do many Greeks seem to understand that the €200 billion (S$325 billion) in additional help given to them over the past year is the hard-earned money of other European taxpayers; the view from Athens is that these are funds plucked out of thin air by 'fat bankers'.

Germany, which provided the bulk of the bailout money, gets no gratitude either; some Greeks believe that the Germans should offer the cash for free, as 'compensation' for World War II.

It is now impossible to reverse this poisonous Greek narrative. It is equally impossible to see how any Greek leader can persuade his people to stick with austerity policies which have slashed the nation's wealth by a fifth. The conclusion is inescapable: default is looming. More ominously, it is likely to be a messy affair.

Greek politicians such as Mr Alexis Tsipras, the youthful leader of Syriza, the radical left movement which sprang out of nowhere to become the country's second-biggest party, assume that they can blackmail the rest of Europe into continuing to offer cash without preconditions.

[Politicians in trying to get themselves elected, will say anything, even lie to the electorate. Then the voters cannot make an informed decision based on facts, and instead vote on stories spun by the politicians. And that is how tragedies are created.]

The defeat suffered by German Chancellor Angela Merkel in local elections on Sunday is also interpreted as a move away from the policies of austerity which Dr Merkel foisted on the rest of Europe.

But while a weaker Merkel government may lead to a greater German readiness to relax austerity conditions on other European nations such as France or Spain, it does nothing for Greece. German voters, as surveys have shown, are not clamouring to hand over their money to the Greeks and, with Greece accounting for only 2.3 per cent of Europe's economy, the country is dispensable.

Indeed, making an example out of Greece by rejecting any concession is almost certain to be Dr Merkel's way of showing the rest of Europe that Germany cannot be taken for granted.

The Greek default may come as soon as the end of next month, when Athens has to cut another €11 billion out of its government spending - which given the new composition of the Greek Parliament, cannot happen. If the European Union stops offering money then, Greece will default almost immediately.

What follows after that amounts to - as one EU official put it - 'a jump into the abyss without a parachute'. A Greek default could trigger off a Europe-wide panic, leading to the collapse of the euro and a global economic slump.

But there are good grounds for believing that this is too alarmist. Most Greek debt is already in the hands of European governments or the European Central Bank, which means Greece's default will not spell a European-wide banking meltdown.

Greek banks will, of course, collapse. The country will have to issue a new currency, which will promptly crash. It will also have to temporarily close its borders in order to prevent capital from fleeing. And, as unemployment soars, the chances of civil strife in Greece remain high.

The technical difficulties which could be created by a Greek default remain mind-boggling. But European governments have spent months quietly preparing for such an eventuality. Nor would it be surprising to discover that Greece has already printed an alternative currency. It may have not have been coincidental that the Greek national bank upgraded its British-made printing presses last year.

The key for the rest of Europe will be to make sure that a Greek default remains confined to that country. This will mean that other vulnerable nations such as Portugal or Spain, would immediately be offered additional bailout funds even if they don't actually require it; the purpose should be to reassure people that countries which observe their obligations retain the benefits of Europe's single currency.

No doubt Europe's credibility will suffer a permanent blow: it will no longer be possible for it to claim that it is an 'oasis of stability' after allowing one of its members to default. So, for decades to come, Europe will have to pay a risk premium on its borrowing.

Still, Mr Jens Weidmann, the head of Germany's central bank, the Bundesbank, was probably right when he pointed out over the weekend that, 'for Greece the consequences would be much more grave than for the rest of the euro zone'. Investors will conclude that Greece was a uniquely horrible case, and that its fate need not be replicated elsewhere in Europe.

Ironically, however, Greece will not escape from its obligations by defaulting. If it wishes to remain part of the EU, it will still have to repay every cent it owes and may have to do it the harder way, with its own devalued currency. The Greeks will also be unable to borrow, so they will be confronted by the rather unusual experience of having to live within their means.

The nation which invented the word 'tragedy' should grasp this situation pretty well.

Monday, May 14, 2012

TODAYONLINEWhy would an international best-selling writer on creativity live here? Because while New York may call itself 'the capital of the world', Singapore is the world

by Fredrik Haren

May 14, 2012

I have lost count of the number of times I have been asked: "As an author of creativity books, how on earth can you live in Singapore?"

And when I reply, "Because I think it is the best place in the world to live for a creative person", most people think I am kidding and everyone asks me to explain.

But no, I am not kidding. And yes, let me explain.

I moved to Beijing from my native Sweden in 2005 because I wanted to be in Asia when Asian countries truly started to embrace creativity.

The defining moment for me was when Hu Jintao gave a speech to the Chinese people in which he said that "China should be an innovative country 15 years from now".

Since I write books on business creativity, I just had to move to Asia and see this shift happen.

After two years in Beijing, I learnt two things: Firstly, I wanted to leave Beijing, which is a fascinating city, but has too much traffic, too much pollution and too little water for a Swede brought up in the Stockholm archipelago; and secondly, I wanted to remain in Asia.

So I went on a grand journey. While doing research for my book The Developing World, I constantly travelled over a period of more than 10 months.

I went to 20 developing countries and when I came to each new city that I thought had potential to become my new home, I made sure my schedule allowed me to stay a few extra days to get a feel of life there.

I spent two weeks each in Seoul, Hong Kong, Bangkok, Shanghai, Mumbai, New Delhi, Istanbul and Singapore.

Then I made a list of positives and negatives about each city. Obviously, Singapore won in the end.

SINGAPORE VIRTUES

Why? Well, for many reasons.

Such as quality of life - I now drink as much fresh mango juices in Singapore as I did beers in Beijing, weather (no, I do not mind the heat; I love it), security (I love countries where there is a good chance you will get your iPhone back if you left it behind in a restaurant) and convenience (like the fact that Changi Airport has extensive connections to the world, since my work involves a lot of travelling to different countries on a frequent basis).

Those are the usual reasons that attract most people to Singapore.

But the main reason I live in Singapore is because this city-state, to me, is the one place on earth where it is the easiest to have a globally-creative mindset.

Some people say Singapore is "Asia for beginners". I do not agree. I think Singapore is "globalisation for beginners", or rather, "globalisation for early adopters".

With a diverse mix of races, religions and nationalities, Singapore not only represents the cross-section of the world, it is also a time capsule of what the world will look like in the future.

And I love that.

New York may call itself 'the capital of the world' but Singapore is the world. Unlike New York, which is a global city in the United States, Singapore is a global city - a global city-state. Singapore is a city in the world, not a city in a country in the world.

And this makes it easier to have a global outlook here since nationalistic barriers do not block the view as much.

[Interesting perspective of a City in the World, as opposed to a City in a Country in the World. At the same time, it would seem to present a vulnerability of Singapore to the World, as it meshes directly with the world, with no intermediating "country" or hinterland to act as a shock absorber. The world impacts us directly.]

A BEAUTIFUL MIX

A positive side-effect of this is that Singapore is one of the least racist countries in the world.

Now, that does not mean that there is no racism in Singapore, but I have worked in more than 40 countries, and I have never experienced less racism than I do in Singapore.

That is important to me. Not only because we are a mixed-race family - I am from Sweden, my wife from the Philippines and my son a happy mix of Stockholm, Manila and Singapore.

As an European, I am ashamed and disappointed when European leaders recently proclaim that "the multi-cultural society does not work". I just wish they would come to Singapore.

To live in a place that is celebrating "Western New Year" and "Chinese New Year" is not only twice as fun, it also gives you the feeling that there is more than one way of doing things.

On a recent New Year's Eve party, we realised our group consisted of 10 people with 10 different passports.

A friend told me how they had had an after-work beer at his company and 14 people - from 14 different countries - showed up.

At our wedding, we had 40 guests from eight countries, comprising at least four religions and four races, and, at the time, no one was counting.

It all just felt as if it was the most natural thing in the world. The point, of course, is that it is not the most natural thing in the world. Unfortunately, in most places in the world, it would be rare, strange and exotic to have such a natural mix of backgrounds.

For people living in Singapore, it is so natural you do not grasp how unnaturally natural it is, and how valuable.

OF ROOTS AND BRANCHES

Now, do not get me wrong. I am not saying that knowledge of your own culture and background is not important. It is.

It is often said that a person without roots is fickle, doesn't know how to connect to who he is and can be easily manipulated, because there are no basic values keeping him grounded. Roots are important.

But if one is going to use a metaphor (in this case, of likening a human being to a tree), one has to use the whole metaphor. Because it is equally true that a tree without branches also perishes.

A tree that does not spread its branches out in all directions to gather as much sunlight and energy as possible might have deep and strong roots, but it will eventually still wither and die.

In other words, to be rootless is dangerous, but so is being branchless.

And if your own culture is the roots, the cultures of the rest of the world is the energy that your branches need to reach out to, so that you can get new ideas and ways of doing things by learning from others, be inspired to try new foods, acquire new habits and try new customs.

It will make you curious of other ways of doing things, be inspired by different ideas and energised by alternate points of views. And that is what creates creativity.

And nowhere in the world is it easier to let your branches spread out than in Singapore.

Want some exposure to American influence? Watch American Idol the day after it airs in the US.

What about a dose of Indian culture? Join in the Deepavali celebrations together with thousands of Indians in Little India.

Want to practice your Chinese language? Go and order frog in Geylang.

HEIMSKUR MEANS 'MORON'

The Icelandic Vikings, who lived a thousand years ago, had a word for people who never left their farms on Iceland and never ventured outside. The word was heimskur. It means moron.

As they saw it, a person who did not open up to the world to find new ideas from other cultures was a moron. I think the Vikings would have loved Singapore. I sure know that I do. It is the one place with the fewest heimskurs that I have found .

Too many people limit their potential, their creativity - and in the end - their lives, because they are not embracing the whole human spectrum of creativity.

They are not taking full advantage of the potential of the world, because they are not living in the world. They are stuck in their own corner, looking inwards, seeing whatever that is different as "foreign".

And I think that answers the question of why I am living in Singapore - because Singapore makes me more human by making me more a part of the world, a part of humanity. And by being part of the world, I have a bigger chance to be inspired and have new ideas.

Ideas that will benefit us all.

Fredrik Haren, an author and speaker on business creativity, has lived in Asia since 2005, and has been in Singapore since 2008. His work The Idea Book has been included in The 100 Best Business Books of All Time. This article appears in the Singapore International Foundation's book aimed at bridging communities, Singapore Insights from the Inside.

Saturday, May 5, 2012

When writing this article, one is quite tempted to take the easy way out: Write about the importance of free speech, how a free press emboldens democracy and provide some sort of semi-horrifying/semi-inspirational anecdote about a journalist who was very brave and faced the odds and now everything is better and democracy stands triumphant, all because of a free press.

And quite naturally, since I am one of the New Media pioneers (remember when it used to be called just blogging? I miss that), not to mention a "voice of the Egyptian revolution", I am supposed to take this stand and advocate that position with all the might and power of the Jan 25 revolution.

I really want to, but … I can't, because there is a problem in the premise and it is one that won't go away anytime soon.

It used to be easy to advocate this point of view, that of a simplistic world where the evil government oppressed the good journalists and bloggers, and where the Internet offered us the only space of freedom of speech that we were allowed to exist in.

The basis of this view was quite evident: The regime used to ban newspapers, arrest journalists, and the journalists would fight back in courts and we would stand in solidarity defending the right to free speech and freedom of the press.

This view was something that I subscribed to until we had the revolution and the regime was gone and for a good while we had no censorship, during which time, slowly but surely, that point of view went through a serious case of deterioration. Let me explain.

FATAL FLAW SURFACES

Before the revolution there were two kinds of press in Egypt: Newspapers that were against the regime and newspapers that were trying to be mediators between the regime and the people (whether by being state-owned media or "centrist" journalistic institutions).

Then the revolution happened and there was suddenly no regime. That is when the fatal flaw showed its face.

The anti-regime newspapers suddenly had no regime to oppose or ministers to expose and the mediating newspapers suddenly had no regime to mediate for. It all went downhill very quickly.

The anti-regime newspapers milked the old regime for all its worth, spending month-upon-month writing about the scandals of the regime and its ex-officials, most of which were articles that were poorly sourced and mostly based on "hearsay" and "truisms" or "common-knowledge".

The mediating newspapers didn't have a single editorial line that they could or were able to follow, which used to lead to opposing headlines on the same topic in two consecutive days, without a hint of an explanation or apology for the 180-degree switch in 24 hours.

At a time in which the whole nation was looking for guidance and truth, the Egyptian press lacked both, despite the fact that they had all the freedom in the world.

Or maybe because of it - because now we had all the freedom, accompanied by zero accountability, and serious resistance to any form of it as well.

Hubris or power-drunk are not the right words, but they are the first to come to mind. And then things got worse.

PRESS BECAME BATTLEFIELD

You see, this model presented the journalists of the old-regime a golden opportunity to do the same thing to revolutionary forces through their old or new media outlets, which led to a series of incredibly false and scandalous reports about the revolution's symbols, none of which they were ever held accountable for.

The press became a battlefield of conflicting false accounts and exaggerations, truth was the first casualty, and all credibility went out the window.

We suddenly lived in a Huxley-ian world where there was no truth, only narrative, and the people got flooded with such conflicting information that they either believed what they wanted to believe (whether it was "The revolutionaries are foreign agents" or "Mubarak still rules us") or tuned out completely from the entire process and stopped paying attention to any of the current events or caring about their outcome.

Until this day, this still holds true: No one has identified the problem or tried to solve it in any real way, given that all the players have seemingly decided that credibility no longer matters, as long as the content is controversial and sells issues.

So, yeah, after an entire year of this, I am not entirely sure that the free press truly supports democracy in our case. However, it does get people talking, so if silence truly kills democracy, I guess our press is doing its job protecting it.

This article commemorates World Press Freedom Day today. Mahmoud Salem is an Egyptian blogger, activist, writer and entrepreneur. He was also one of the leading voices in the Jan 25, 2011 revolution that brought down Egyptian President Hosni Mubarak.

He is currently involved in many development and transparency projects for a better Egypt.

[I do not know what the role of the press should be in a society. Especially in the internet-connected society. When news was reported in the morning papers and the evening TV news, there was a tranquility, a stability of the day. A certainty that news happened, but we will learn of it after dinner.

Then headlines were reported every hour. Then every half-hour. Then there were news magazine shows on TV. And news was now on tap. News came at whatever time it happened. Breaking news! Newsflash! There was an immediacy to the news. It just happened! I just told you! Now you know!

So what are we to do with this news? With the immediacy, there was also an implied urgency. "This just in! Singapore's TFR has dropped to 1.2!" So what are we supposed to do about it? Go home and make babies?

I think the role of the press is to be the voice of the people and the mediator for the govt. If the govt is incompetent it should report the incompetency and be a voice for the people. If the govt is competent, it should help explain govt policies. If the govt is corrupt, it should expose these corruptions. If the people are unreasonable, it should help educate the society at large. But that's just my opinion.]

CREDIT is the grease that lubricates the engine of modern economies. If it stops flowing, a global recession is guaranteed. That's the fear.

A related concern is that ultimately Greece and some of the other debt-ridden countries of Europe may figure out that they really need to print their own money to climb out of the hole they are in. That will mean a break-up of the euro zone, which will be a huge shock to the global economy.

The odds of this happening soon are slim. European nations' decision to forge a monetary union was the culmination of a post-World War II political project that sought to bind European nations' destiny together so that there won't be another war between neighbours. A break-up of the euro zone will be a serious setback to that political goal. Yet, it's hard to see how the current monetary arrangement will survive without a fiscal union.

In a fiscal union, countries will no longer have independent finance ministries. The tax revenues of all euro zone countries will be pooled and then distributed among them by a centralised finance ministry according to some formula.

This central ministry will also raise money from the markets on behalf of all states by selling 'euro zone bonds' that are jointly guaranteed by all euro-area nations. Germany and Spain can continue to sell their own bonds - much like California does. But US law does not allow California to go bankrupt; and, in such an arrangement, nor would it be possible for Spain to go bankrupt. The euro zone will come closer to becoming a United States of Europe.

How will this help?

To answer that question, we need a history tour, and look for clues in the past - not in Europe's past, but in that of the United States of America as that nation was just being born.

Circa 1790, the US was a fledgling nation state that had recently thrown off the British colonial yoke after a costly war of independence. Just like Greece today, back then Massachusetts, South Carolina and 11 other US states were in trouble. Altogether these 13 states had accumulated war debt of US$25 million and had no real hope of being able to pay it.

So the question was whether the newly created federal US government should assume this bad debt, or let Massachusetts and other states default.

States like Virginia and North Carolina that had paid off their own war debts abhorred bailing out Massachusetts, much like Germany today resents rescuing Greece. Politicians of Virginia reckoned that they would gain little from the higher taxes that their state would have to bear to pay off the debt of Massachusetts.

But the first Treasury Secretary of the US, Mr Alexander Hamilton, was a man of tremendous foresight. In order to establish a reputation for the federal US government's creditworthiness, he cajoled Virginia to go along with the plan to bail out Massachusetts. To do this, Mr Hamilton gave up his demand that the capital of the new nation be in New York. The Virginia delegation wanted a site along the Potomac River. Thus it was the resolution of a debt crisis that saw Washington becoming the capital of the US.

This story has a couple of messages for present-day Europe: A debt of US$25 million for the United States of 1790 translates into a €1.2 trillion (S$2 trillion) liability for today's Europe, according to Citigroup economist Nathan Sheets. Mr Hamilton was not playing with small change; he was committing his nation to an onerous burden. If Germany wants to see a stable, prosperous Europe, it cannot avoid taking on a large commitment.

The second message is that economists will not be able to solve Europe's debt problem. It will take far-sighted politicians of Mr Hamilton's calibre and vision.

Does German Chancellor Angela Merkel have what it takes? We should leave that question to future historians.

ONCE again, European efforts to contain its crisis have fallen short. It was perhaps reasonable to hope that the European Central Bank's commitment to provide nearly a trillion US dollars in cheap three-year funding to banks would, if not resolve the crisis, contain it for a significant interval.

Unfortunately, this has proved little more than a palliative. Weak banks, especially in Spain, have bought more of the debt of their weak sovereigns, while foreigners have sold down their holdings. Markets, seeing banks holding the dubious debt of the sovereigns that stand behind them, grow ever nervous. Again, Europe and the global economy approach the brink.

The architects of current policy and their allies argue that there is insufficient determination to carry on with the existing strategy. Others argue that failure suggests the need for a change in course. The latter view seems to be taking hold among the European electorate.

This is appropriate. Much of what is being urged on and in Europe is likely to be not just ineffective but counterproductive to maintaining the monetary union, restoring normal financial conditions and government access to markets, and re-establishing economic growth.

The premise of European policymaking is that countries are over-indebted and so unable to access markets on reasonable terms, and that the high interest rates associated with excessive debt hurt the financial system and inhibit growth. The strategy is to provide financing while insisting on austerity, in hopes that countries can rein in their excessive spending enough to restore credibility, bring down interest rates and restart economic growth. Models include successful International Monetary Fund (IMF) programmes in emerging markets and Germany's adjustment after the expense and trauma of reintegrating East Germany.

Unfortunately, Europe has misdiagnosed its problems in important respects and set the wrong strategic course. Outside of Greece, which represents only 2 per cent of the euro zone, profligacy is not the root cause of problems. Spain and Ireland stood out for their low ratios of debt to gross domestic product (GDP) five years ago, with ratios well below Germany's. Italy had a high debt ratio but a very favourable deficit position.

Europe's problem countries are in trouble because the financial crisis under way since 2008 has damaged their financial systems and led to a collapse in growth. High deficits are much more a symptom than a cause of their problems. And treating the symptoms rather than the underlying causes is usually a good way to make a patient worse.

The cause of Europe's financial problems is lack of growth. In any financial situation where interest rates far exceed growth rates, debt problems spiral out of control. The right focus for Europe is on growth; in this dimension, increased austerity is a step in the wrong direction.

Systematic comparisons suggest that when economies are demand-constrained and safe short-term interest rates are near zero, policy measures that reduce the deficit by 1 per cent have a multiplier of 1 to 1.5 - implying that a 1 per cent reduction in a country's ratio of spending to GDP or an equivalent tax increase reduces its GDP by 1 to 1.5 per cent.

Essentially, cutting deficits will have a disproportionately adverse effect on GDP because the multiplier is larger than 1 on the growth-reduction side of the equation. This means that austerity measures at the national level are likely to be counterproductive in terms of creditworthiness. Fiscal contraction reduces incomes, limiting the capacity to repay debts. It achieves only limited reductions in deficits once the adverse effects of economic contraction on tax revenue and benefit payments are accounted for. And it casts a shadow over future growth prospects by reducing capital investment and raising unemployment, which inevitably take a toll on the capacity and willingness of the unemployed to work.

These considerations are magnified at the continental level. Slowdowns in one country reduce the demand for the exports of other countries. As a matter of arithmetic, increases in saving and exporting in some countries have to be offset by increases in spending and importing in others. Germany's enormous success in recent years has been achieved by the nation's becoming a large-scale net exporter - it would not have been possible without large-scale borrowing and importing by Europe's periphery. The periphery cannot possibly succeed in substantially reducing its borrowing unless Germany pursues policies that allow its surplus to contract.

Sceptics will rightly wonder how a prescription for more spending by countries that already have trouble borrowing can be correct. The answer lies in the difference between borrowing by individuals and countries.

Normally, an individual helps his creditors by borrowing less; but a person who stops borrowing to finance commuting to his job does his creditors no favour. A country's income is determined by spending, so a country that pursues austerity to the point where its economy is driven into a downward spiral does its creditors no favour.

Yes, there will ultimately be a need to raise retirement ages, reform sclerosis-inducing regulations and restructure benefit programmes; phased-in commitments in these areas would be constructive.

But the prospect for political and economic success in these endeavours depends on growth being restored.

Only if growth is restored can the euro endure and European financial problems be resolved. If there was ever a situation that called for a collective response, this is it.

Going forward, the IMF and international community should condition further support not merely on individual countries' actions but on a common European commitment to growth.

The writer, a former economic adviser to US President Barack Obama, was Treasury Secretary in the Clinton administration.

WASHINGTON POST---

No alternative to belt-tightening

By Gideon Rachman

SPANISH unemployment is nearing 25 per cent. The suicide rate is climbing in Greece. Britain is in a double-dip recession. Amid all this pain, the cry is growing louder. Austerity policies in Europe are dangerous. Someone has to stop this madness.

Step forward, Francois Hollande, the likely winner of the French presidential election. He is campaigning as the man who will stand up to the austerity ayatollahs in Germany. His campaign is resonating - not just in Europe, but even in the United States, where the grandees of the economics profession, from Larry Summers to Paul Krugman, are lining up to call for an end to Europe's austerity policies. 'Insane,' Professor Krugman calls them, with characteristic understatement.

Mr Hollande says he will replace austerity with growth. Why didn't anybody think of that before? Unfortunately, a vacuous slogan is underpinned by ineffectual proposals. Mr Hollande's programme stresses small, badly targeted boosts to public spending, while virtually ignoring the structural reforms that are the only route to sustainable growth.

Spending on infrastructure - 'shovel- ready' projects, as US President Barack Obama has called them - is, of course, a standard Keynesian solution for an economy that is caught in a downward recessionary spiral. Under normal circumstances, such spending might be a great idea.

In Europe, however, there are plenty of reasons to be sceptical. If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming. The past 30 years have seen a huge splurge in infrastructure spending, often funded by the European Union. The Athens metro is excellent. The AVE fast trains in Spain are a marvel. But this kind of spending has done very little to change the fundamental problems that now plague both Greece and Spain - in particular, youth unemployment.

Worse, in some ways, EU funding for infrastructure has created problems. In Greece, milking the EU for subsidies became an industry in itself; and political connections were a surer route to wealth than entrepreneurial flair.

As for Italy and Spain, they are not cutting their budgets out of some crazed desire to drive their own economies into the ground. Their austerity drives were a reaction to the fact that markets were demanding unsustainably high interest rates to lend to them. There is no reason to believe that the markets are now suddenly prepared to fund wider deficits in southern Europe. The 'end austerity now' crowd respond that it is the responsibility of Europe's dwindling band of triple A rated countries to go on a consumption binge and so pull their neighbours out of the mire. But the assumption of unlimited Dutch and German creditworthiness is unconvincing - as the market reaction to the Dutch failure to agree a budget illustrated.

Even in France, the centre of the revolt against austerity, it is hard to argue that the problem is that the state is not doing enough. This is a country where the state already consumes 56 per cent of gross domestic product, which has not balanced a budget since the mid-1970s, and which has some of the highest taxes in the world.

Mr Hollande, who is not an idiot, knows all this. That is why, behind all the feel-good rhetoric about ending austerity, the small print is less exciting. In fact, all the Socialist candidate is promising to do is to take a year longer than President Nicolas Sarkozy to balance France's budget. In Europe, even the left cannot pretend that deficit spending can continue for ever. So they are reduced to arguing that governments are cutting, 'too far and too fast', in the words of Britain's shadow chancellor Ed Balls. This is small-scale quibbling - masquerading as a major doctrinal dispute.

For while the Germans are often portrayed as knuckleheaded advocates of endless austerity, their real message is more sophisticated and convincing. It is that the drive to balance budgets within Europe must be combined with reforms that will encourage private-sector job creation.

The scope for such reforms is enormous. Taxes on labour in France are very high. To his credit, Mr Hollande is promising tax breaks for employers who hire young people. But it would be better simply to cut charges on labour across the board. This is one tax cut that really might pay for itself, by creating jobs.

European businesses are also hobbled by red tape. My favourite recent example was a story in the New York Times of a Greek entrepreneur, whose efforts to start an Internet business involved an odyssey of form-filling, culminating in an official demand for a stool sample. High rates of youth unemployment in countries such as Spain and Italy are closely connected to the excessive protections and benefits for workers on full-time contracts - which make employers wary of taking on new hires. As one Spanish businessman recently complained: 'In this country, it is easier to divorce your wife than to sack an employee.'

Pushing through labour market reforms is tough and even dangerous. In Italy, in recent years, two economists advising the government on labour-market reforms have been assassinated. But such reforms are the only long-term route to stronger job creation.

By contrast, calls for Europe to spend its way out of debt are an illusion. There is, of course, scope for argument about the pace of deficit reduction. But in a highly taxed, highly regulated, highly indebted continent like Europe, more state-funded public works would simply build another road to nowhere.

FINANCIAL TIMES

Austerity folk have got it wrong

By Andy Mukherjee

MR GIDEON Rachman's defence of austerity has three elements. He says a 'standard Keynesian solution' might be a great idea under 'normal circumstances'. So presumably the circumstances in present-day Europe are not normal.

He doesn't fully explain why they are abnormal, but goes on to argue that markets demanded budgetary belt-tightening; governments had no option.

Finally, he cites anecdotes - a Greek entrepreneur frustrated by red tape; AVE fast trains in Spain - to suggest that state spending is no cure for inherent inflexibility in the economy.

The point he does not discuss - and the argument that lies in the heart of professors Paul Krugman and Lawrence Summers' analysis - is this: What should policymakers do when interest rates are near zero, which is the case in both the United States and the euro zone today, and still the private sector refuses to borrow?

Such a situation arises only after an asset bubble has burst. Spain, Ireland and the US are in difficulty today because of a real estate collapse. They are in a balance-sheet crisis, which is like a very bad toothache.

If you went to your dentist with shooting, unbearable pain and he advised you to brush your teeth twice daily, he's giving you good advice but at the wrong time.

Making labour markets more flexible and improving the business climate could have been useful in the past; they may be of great assistance in the future. But will they help Europe right now?

What is abnormal right now in much of the developed world is that Panadol hasn't worked: Interest rates are hugging the floor, yet there is no meaningful recovery. Keynesian medicine is not for 'standard' times, as Mr Rachman seems to think; it's for unusual times like today. That is what makes austerity - the exact opposite of the remedy - a crime.

The other point that neither Mr Rachman nor Professor Summers has explicitly considered is that the euro-system design is flawed.

Nomura Research Institute chief economist Richard Koo estimates that private savings in Spain have risen by almost 18 percentage points of gross domestic product since 2007.

Out of this, the government has absorbed less than 12 percentage points by running up its budget deficits. The remaining 6 percentage points have leaked out of Spain and gone to Germany and the Netherlands. If this private capital had not fled, it would have been forced to seek safety in Spanish government bonds. There wouldn't have been a sovereign debt crisis in Spain, just like there hasn't been one in the US.

So when Mr Rachman says it was the bond market that demanded austerity in peripheral Europe, he's only half right.

Yes, the market demanded it because it could: It had the option of 17 'risk-free' government securities, all denominated in the euro, to choose where to park its money after the crisis. In the US, or Britain, or Japan, the bond market doesn't have this luxury. There's only one dollar-denominated riskless security; and only one that is denominated in yen or the British pound. A Tokyo bank that has a yen deposit to repay takes a currency risk when it looks for a safe investment in US treasuries.

The architects of the euro zone should not have given investors the latitude to move money, apparently without any extra currency or credit risk, from one national economy to another.

But all that is ancient history.

To misread this capital movement as a signal from bond markets that greater austerity is needed is a modern myth that German Chancellor Angela Merkel fell for.

It's her lack of judgment that has brought Europe to the brink of a disaster.

andym@sph.com.sg

[I'd say "Brilliant analysis", but that's like an ant saying an elephant is big. It's true but the testimony of an ant on size is not much of a testimony.]

Thursday, May 3, 2012

JONATHAN Lynn and Antony Jay, the writers of the 1980s political satire Yes Prime Minister, have a great way of making difficult concepts accessible.

In one episode, Britain's chief scientific adviser (who with an Austrian accent seems to be styled after Dr Strangelove) grills the prime minister about when he would 'press the nuclear button' to prevent Soviet encroachment in Europe.

Will he press the button if the East German fire brigade crosses from East to West Berlin? No, the premier says. When the firemen are replaced by East German soldiers? Not quite, the PM answers.

Will the prime minister press the button when the Soviet army is poised to invade Britain? Well no, the premier says, saying that nukes were meant to protect Britain only.

'What is the last resort? Piccadilly?' the adviser scoffs.

In a six-minute clip, Mr Lynn and Mr Jay had just explained salami tactics. This entails a divide-and-conquer strategy that demands 'a little more each day, like cutting up a salami, thin slice after thin slice'. Soon, the opponent realises that he has lost most, if not all, of his salami.

But salami tactics is not an artefact of Cold War history. Today, Asian countries are seeing China replicate exactly the same strategy over the disputed South China Sea.

In early April, Chinese fishing boats went to the disputed Scarborough Shoal, which is claimed by Beijing and Manila. The Philippines sent in its biggest warship to arrest the fishermen, but China deployed civilian maritime vessels to block the warship. Manila then pulled back the warship and replaced it with a smaller coast guard vessel.

On Sunday, one Chinese surveillance ship remained in the area after two others pulled out.

In essence, the incident has left the Philippines with a thin slice of salami. And if China's past behaviour is any guide, Manila risks losing a huge chunk.

Since the 1990s, China has employed salami tactics in staking its claim to the South China Sea - what Filipinos call a 'creeping invasion'.

The classic example is the aptly named Mischief Reef.

In 1994, China built structures on the reef, which is located just 210km from Palawan. Manila protested, but China said the structures were for fishermen. In 1999, China added fort-like structures on the reef.

Each time China slices the salami, the Philippines is faced with a dilemma - escalate the incident and risk a military conflict, or step aside and allow China to expand its territorial claims.

One Asian naval officer told me that Manila has effectively chosen the latter option. 'The Philippine Navy bungled the whole thing. They should have arrested the Chinese fishing crew and took them to Manila. Now they have let China step all over them,' he says.

China's salami tactics might reap dividends in the long run, since the occupation of any disputed islands bolster its legal case for sovereignty.

More importantly, China's salami tactics challenges Washington, which has declared that it would 'pivot' or return back to Asia.

To its credit, the US has gone to great lengths to show its support for Asian countries which have South China Sea disputes with Beijing. In 2010, US Secretary of State Hillary Clinton riled China when she said that the disputes should be settled multilaterally.

That said, each time China wins tactical victories against US allies such as the Philippines and Japan, Asian countries will increasingly question US security guarantees.

To mark the 60th anniversary of America's alliance with Manila in November, Mrs Clinton boarded the USS Fitzgerald, one of the US Navy's most powerful warships while it was anchored in Manila Bay. She declared that the US 'will always be in the corner of the Philippines and we will stand and fight with you'.

The fact is that the Philippines was left to its own devices during the Scarborough incident.

Granted, the US has sought to make all the right noises on the issue. As the US and the Philippines conducted the Exercise Balikatan series of war games recently, US Marine Lieutenant-General Duane Thiessen was asked whether the US would come to Manila's aid if Chinese armed forces attacked Philippine units over conflicting claims to the Scarborough Shoal.

Said Lt-Gen Thiessen: 'The United States and the Philippines have a mutual defence treaty which guarantees that we get involved in each other's defence and that is self-explanatory.'

Professor Donald Weatherbee at the University of South Carolina argues that there is no automacity in US support for Manila, given that there is enough 'wiggle room' in their defence treaty for the US to shirk responsibility. 'It would seem realistically that the MDT (mutual defence treaty) has little deterrent value,' he writes in a report for Pacific Forum, a Honolulu-based think-tank.

The same applies to Japan's tussle with China over the disputed Senkaku islands. In 2010, a Chinese fishing trawler collided with a Japanese Coast Guard ship. The crew of the trawler was held in custody, but all were released following high-level Chinese protests.

And note that Tokyo's embarrassing back-down comes amid US officials' insistence that the Senkakus is covered by Tokyo's military alliance with Washington.

Granted, the US faces the same dilemma as the Philippines - it could escalate and activate its alliances, or remain passive. Pivot notwithstanding, however, the US is displaying little push-back against China's salami slicing.

Meanwhile, the geopolitical map in Asia is being rearranged. China, according to Japanese academic Yukio Okamoto, now views the East China Sea, the Taiwan Strait and the South China Sea as its own 'internal waters'.

And pressed by China's so-called anti-access area denial (A2AD) strategy that threatens US Navy ships approaching China's coastline, the US has moved troops and ships farther off from China. It has stationed marines in Darwin and plans to rotate ships and subs through naval bases in Perth and Brisbane.

Understandably, the US will pick its fights with China very carefully. But as in the Cold War, the logic of salami slicing will apply - if one doesn't push back against someone slicing your salami, the salami will all be lost someday.